Privacy Regulation, AI, Contactless Payments Among 2021's Key Themes: Oxygen
Will fintechs disrupt traditional banking in 2021?
With contactless and digital payments now being the norm, Oxygen Banking predicts that neobanks will dominate and traditional financial institutions will look to startups to help compete in this new reality.
Oxygen Banking is a modern financial platform specifically designed to meet the unique needs of freelancers, small businesses, and digital natives. Just this week, they announced research about how COVID has impacted the shopping behaviors of people this holiday season.
Oxygen’s team of experts used their knowledge of the field to forecast the future of the financial services industry for this coming year and beyond.
Collaboration Is the Future
Digital-only banks are upending the traditional finance industry, forcing many established players to take a hard look in the mirror. While competition is nothing new in financial services, 2021 will see more and more established players looking to startups to help compete in this new reality. I see this unfolding in three primary ways: mergers & acquisitions, direct investment and partnerships. 2020 saw a hot M&A market despite the pandemic, with such notable deals as Visa’s $4.9 billion acquisition of Plaid Inc. (currently stalled after a DOJ antitrust filing), Mastercard’s nearly $1.0 billion acquisition of Finicity, Intuit’s acquisition of Credit Karma, and American Express’s acquisition of Kabbage, to name just a few. We see no slowdown of activity in 2021 here. On the investment front, corporate VC, which includes corporations, private equity firms, single-family offices, and sovereign wealth funds, has skyrocketed over the last few years with checkbooks that often dwarf traditional VC funds. Particularly for corporations and traditional FIs, it allows them to see emerging technologies for potential acquisition while also developing a fintech ecosystem. Last, we look for partnerships to continue to grow in 2021 as “embedded fintech” extends to more platforms that realize the value that adding financial services can be for their own value propositions.
Hussein Ahmed, Founder & CEO, Oxygen
Contactless and Digital Payments Continue to Surge
The US is notoriously behind much of the rest of the world when it comes to payments technology, sometimes embarrassingly so (checks!). Contactless payments are no different, though that is changing. According to a study from the National Retail Federation and Forrester, 67% of retailers now accept one or more forms of contactless payments, an increase of almost 40% year over year. And the timing couldn’t have been better, as the COVID-19 pandemic saw people staying home and ordering in and, when they did go out for basic necessities, sharply limiting contact with high trafficked surfaces that increased the potential to attract the virus. In April of this year, Mastercard reported a circa 40% jump in contactless payments just one month into lockdown. The aforementioned NRF survey showed retailers reporting a 69% increase in contactless transactions in Q320, suggesting a further increase. What’s perhaps most interesting about this shift is that it accelerated the adoption of contactless and digital payments by several years, in many cases leapfrogging the traditional technological life cycle. While it took us a while to get here, 2020 can be seen as an inflection point. Do not look for this trend to slow down anytime soon.
Hussein Ahmed, Founder and CEO, Oxygen
Neobank 2.0: A Perfect Storm
It has been said that technological change often happens gradually, then suddenly. For the U.S. neobank segment, the gradual buildup we’ve seen over the last 5-7 years is set to produce a “perfect storm” of contenders in 2021. According to a recently published FDIC survey – How America Banks – when asked how customers most often access their bank account, mobile banking was the clear winner, almost doubling to 34% from 2017 to 2019. While the bank branch option had only a modest decline overall, from 24.3% in 2017 to 21% in 2019, a closer look shows this was largely attributed to technological holdouts 45+. Across three segments 15-44, it is nearer 10%. Remember this was pre-Covid data and cannot be welcome news to traditional FIs. While the largest U.S. banks by assets saw either only modest mobile user growth or even decreases from Q2-Q3 ’20, neobanks have been reporting eye-popping growth numbers as customers flock to these digital native platforms. While I’m not suggesting the big four are going the way of Blockbuster, there’s really no way to spin this positively, and community and regional banks are in an even more precarious position. While some continue to see the sector as “overheated” and full of unsustainable business models, I might remind them there are more than 4,500 FDIC-insured commercial banks in the U.S. today, and rebundling doesn’t happen overnight. Sure, there will be casualties, but for the first time in a long time, it’s looking less likely that it will be the consumer.
Ryan Conway, SVP, Head of Business Development & Strategic Partnerships, Oxygen
Crypto and Fintech Firms Partner
Paypal, the original fintech, shocked many when it announced that it would support buying, selling and holding of crypto assets in the U.S., namely bitcoin (BTC), ethereum (ETH),bitcoin cash (BCH), and litecoin (LTC). To those that were paying attention, this should not have been that big of a surprise. PayPal supported bitcoin purchases dating back to 2013 with Braintree and more recently signed partnerships with the likes of Coinbase, Bitpay and GoCoin. Additionally, Wences Caseres, CEO of crypto firm Xapo and “patient zero” of bitcoin for his early evangelism of the technology in Silicon Valley, is a former board member. On the other end of the valley is Square, which has been offering bitcoin purchases via its Cash App wallet since late 2017. In Q3’20, they reported $1.63 billion of bitcoin revenue and $32 million of bitcoin gross profit. Not content with just a significant revenue stream, in October they put $50M of their own balance sheet towards the cryptocurrency. Early returns show that was a pretty good bet. As we hover around all-time highs for bitcoin and there appears a broader acceptance that the technology is here to stay, look for more fintechs to offer crypto products to keep up with the sizable demand.
Ryan Conway, SVP, Head of Business Development & Strategic Partnerships, Oxygen
Privacy Regulation Changes the Direction of AI
People are hyper attuned to data privacy these days. In California, voters passed the California Privacy Rights Act (CPRA) aka Prop 24 on the November ballot. The law comes on the heels of the passing of the California Consumer Privacy Act (CCPA), set to take effect in January 2021. CRPA, which gives businesses until January 1, 2023, to comply, will allow consumers to prevent businesses from sharing personal data, amending their personal data, and limiting the use of “sensitive personal information” such as precise geolocation, race, ethnicity and health information. These two pieces of legislation will most certainly affect artificial intelligence in financial services, which is estimated to both lower the operating expenses of banks by 22% around 2030 and enable more tailored products and services. The risk of this legislation is that it will make it harder for machine learning and AI systems to reach this full potential. Challenge, however, brings opportunity, and this could pave the way for new functions and algorithms like federated on-device learning that can operate in a way that maintains people’s privacy while still meeting its promise.
Ivy Lu, Head of Data Science & Machine Learning, Oxygen
Synthetic Identity Fraud Continues to Challenge FIs
According to the Federal Reserve, the fastest growing type of financial crime in the U.S. is synthetic identity fraud. Combining both real and fake data to create a fictitious identity, synthetic identity fraud cost U.S. lenders circa $6 billion a year, with the average charge-off around $15,000. With the proliferation of data breaches, the dark web has both fake and real identities for sale, making it easy for these fraudsters to pick up or make up the rest, making it one of the most difficult financial crimes to detect. Particularly problematic, there often isn’t a real victim in the traditional sense, which means there’s no one to report the fraud. In a typical scenario, patient fraudsters open accounts with synthetic identities to establish credit and act like any normal customer. Once the criminals use the accounts for fraud (either at the source bank or another bank), it can take several missed credit card payments or suspicious chargebacks for financial institutions to close the account. By that time, criminals have usually pilfered tens of thousands of dollars. In 2020, the pandemic only exacerbated the problem by fast-tracked digital payments and commerce that saw a huge spike in transaction volume, lack of authentication and significant government programs drawing more attention. Unfortunately, we don’t see this subsiding in 2021.
Eric Kinney, SVP Risk – BSA Officer, Oxygen
Machine Learning and AI Take a Big Step Towards Personalized Banking
Instead of white label banking services or a “one-size-fit-all” strategy, banking services will more and more be customized and tailored towards individual customer’s needs. Traditional FIs have historically designed banking products mainly based on internal models of profitability and credit risk, with little consideration on the nuances individual customers desire. In the days of personalized service, this was the norm. Fintechs, on the other hand, have made progress by focusing on specific groups of customers, including student loans, mortgages and subprime credit, or a specific characteristic of the general population. Backed by machine learning and AI, it is possible to design banking products that can be customized and personalized to meet each individual’s needs as the models better understand customer behavior and present relevant products and services in the moments that are most relevant.
Ivy Lu, Oxygen, Head of Data Science & Machine Learning, Oxygen